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Why the Housing Downturn is NOT Over!

All the financial news stations are saying it. And they’re all idiots.

It goes something like this: “Housing is now driving a more sustainable recovery.”

Oh really!

My response to these “experts” is: are you aware that only 30% of home sales are coming from first-time buyers?

This is the crowd that should dominate home sales, especially now that the echo boom generation is starting to ascend into this sector. And they’re accounting for only one-third of the sales? That’s nothing to crow about.

Most of the home sales the “experts” have latched all of their foolish hopes on are from institutional investors, hedge funds or private investors looking to cash in on low home prices by buying to flip or rent them out for positive cash flow.

This does NOT a recovery make…

In every conversation I have with realtors in Tampa, Miami, and other parts of the country, I inevitably hear that most of the sales they see are for cash. And in many of the most booming cities, like Miami, New York, San Francisco, Vancouver, London or Sydney, most of these sales are to foreign buyers.

Does that sound sustainable to you?

It certainly doesn’t sound sustainable to me.

Then there’s another thing…

To qualify for an FHA or government-sponsored loan, which comprises most of the loans these days, you have to bring a foreclosed home up to code. This costs $15,000 on average.

The typical young family, most likely burdened with recently acquired student loan debt, can’t afford to buy a home for cash, put $15,000 into it to repair it, and then get a loan for it. Speculators can though. And that’s exactly what they’re doing.

The thing is, new investors to this game – those who’ve come late to this insane party – are going to be very disappointed, very soon.

The rebound in home prices everyone is talking about is minor – like pathetically minor – compared to prices before the greatest crash of our lifetimes. Look at the Case-Shiller Home Price index for the top 20 cities in this chart…

Case-Shiller 20-City Home Price Index

And let’s not forget that nearly 25% of home mortgages are still underwater, even though we’ve had this so-called rebound. We have gone from 30%, at worst, to near 25%. That’s no progress to be proud of.

Look at this…

U.S. Home Equity Levels, 2010 – 2012

Things are much worse in states like Nevada, which has the highest rate of mortgages underwater at 52%. In Florida, 40% of mortgages are underwater. In Arizona that number is 35%. Georgia 34%. Michigan 32%. Illinois 28%.

The most underwater major cities include my home town of Tampa at 44%. Miami’s at 41%. Atlanta 38%. Phoenix 37%. Riverside 36%. Detroit 35%. Chicago 33%.

And if that’s not bad enough, 92 million baby boomers will die between 2012 and 2042, creating a massive supply of homes on the market. This will overwhelm the demand for homes from the rising echo boomers for decades to come.

All of which is why I think that 2013 will be the last time home prices grow for many years to come.

So, think twice about buying a home or an office building. And don’t let your kids buy a house for at least another few years, and when they do, make sure it’s only after we see another substantial decline in home prices.

If you are looking to buy, use my rule of thumb. Find out what the house was selling for at the beginning of the bubble in January 2000. If it is at that level or lower, you can feel better about buying. If not, wait to buy!Harry

“Market bubbles are often a mass delusion, where investors wrongly assume that prices move in only one direction – UP! And nowhere is this delusion clearer than in real estate,” says economist… Read More>>

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.